S&P 500 Falls for Third Day as Euro Weakens on Cyprus

By Stephen Kirkland, Sarah Pringle and Lu Wang -
Mar 19, 2013

Most U.S. stocks fell for a third
day, the longest slump of the year for the Standard & Poor’s 500
Index, as Cyprus rejected a bank-deposit levy needed to secure
European bailout funds. Treasuries rallied and the euro traded
at a four-month low versus the dollar.

The S&P 500, which climbed to within two points of its 2007
record last week, lost 0.2 percent as of 4 p.m. in New York as
almost three U.S. stocks fell for every two that rose. Ten-year
Treasury yields slid 5.5 basis points to 1.90 percent and
Europe’s 17-nation common currency weakened as much as 0.9
percent to $1.2844, the least since November. Indian stocks sank
the most this month as the government’s biggest ally pulled out
of the ruling coalition. Oil and gasoline slumped at least 1.7
percent to lead commodities lower.

Equities pared losses after the European Central Bank said
it will provide liquidity to Cyprus within existing rules.
Cyprus President Nicos Anastasiades failed to secure
Parliament’s support for imposing losses on depositors, a key
demand of European officials in return for rescue funds. Concern
about the Mediterranean island nation’s impact on the euro
region overshadowed growth in U.S. home construction and a surge
in building permits to the highest level in almost five years.

“Obviously the situation in Europe is not what we want it
to be,” John Manley, who helps oversee about $223.6 billion as
chief equity strategist for Wells Fargo Advantage Funds in New
York, said in a phone interview. “The next couple weeks will be
more periods of chopping around. I don’t think it’s more than 2
to 4 percent in terms of risk on the market,” he said. “The
housing market does seem to be on a bit more steady ground and
that helps the U.S. consumer.”

Near Record

The S&P 500 has declined about 1 percent in three sessions
after climbing to within two points of a record last week.
Caterpillar Inc., Alcoa Inc. and American Express Co. lost at
least 0.9 percent for the biggest declines in the Dow Jones
Industrial Average (INDU), while Coca-Cola Co., Procter & Gamble Co.
and Hewlett-Packard Co. rose more than 1.2 percent to lead the
30-stock gauge up 3.76 points. Commodity, consumer and financial
shares led losses among the 10 main groups in the S&P 500.

Cliffs Natural Resources Inc. (CLF) tumbled 6.6 percent after
Goldman Sachs Group Inc. reduced its forecast for iron-ore
prices. AmerisourceBergen Corp. surged 3.6 percent and Walgreen
Co. jumped 5.4 percent after agreeing to a partnership.
Electronic Arts Inc. slid 8.3 percent after the second-largest
U.S. maker of video games said John Riccitiello is stepping down
as chief executive officer. Lululemon Athletica Inc. tumbled 2.8
percent after lowering its sales forecast because of a pants
shortage following shipments of yoga slacks that were too sheer
to wear.

Housing Starts

An S&P index of homebuilders advanced 0.7 percent, with KB
Home and Toll Brothers Inc. rising more than 1 percent to pace
gains. Builders broke ground on 917,000 homes at an annual rate,
up 0.8 percent from a revised 910,000 pace in January that was
higher than initially estimated, the Commerce Department
reported today. Building permits, a proxy for future
construction, advanced 4.6 percent to 946,000, the strongest
since June 2008.

The dollar strengthened versus 14 of its 16 major peers as
the Federal Reserve starts a two-day meeting today. Ben S.
Bernanke is tightening his control of Fed communications to
ensure investors hear his pro-stimulus message over the
cacophony of more hawkish views from regional bank presidents.

Fed Watch

The chairman, starting tomorrow, will cut the time between
the release of post-meeting statements by the Federal Open
Market Committee and his news briefings, giving investors less
opportunity to misperceive the Fed’s intent. In recent
presentations, he has pledged to sustain easing, defending $85
billion in monthly bond purchases during congressional testimony
last month and warning that “premature removal of
accommodation” may weaken the expansion.

The S&P 500 rallied as much as 131 percent from its 2009
bear-market low through March 14, coming within two points of
its 2007 record close of 1,565.15 (SPX), as the Fed’s programs
suppressed borrowing costs and helped stoke three straight years
of profit growth. The equity index’s dividend yield, currently
at 2.1 percent, has been above the rate on 10-year Treasuries
for almost a year.

‘Bit Extended’

This bull market “is getting time-wise a bit extended,”
Jim Welsh, who helps oversee $6 billion at Forward Management
LLC in San Francisco, said in a phone interview. “Could there
be a little bit more life in this thing? Of course, there can
be. The central bank obviously has the foot pressed to the
metal. People have a lot of faith that that’s going to prevent
anything bad from happening. I don’t believe Fed is going to
change anything any time soon. They’re going to keep rates
low.”

The yen strengthened against 15 of 16 major peers before a
change of leadership at the Bank of Japan tomorrow.

The Stoxx Europe 600 Index lost 0.4 percent today and has
retreated about 1 percent from last week’s 4 1/2-year high.

Parliament began debating the deposit tax about 6 p.m. in
the Cypriot capital, Nicosia, after President Anastasiades told
German Chancellor Angela Merkel in a phone call that he doesn’t
have the support to pass the measure. Lawmakers “feel and think
it isn’t just and that it’s against the interest of Cyprus,” he
told Sweden’s TV4 channel in an interview today.

Bank Deposits

The Mediterranean island nation’s banks and stock exchange
will remain closed at least through tomorrow as the new Cypriot
president seeks backing for the 5.8 billion-euro ($7.5 billion)
levy on bank deposits, a measure needed to win 10 billion euros
in international aid. Finance chiefs from the 17-member euro
area urged Cyprus late yesterday to spare small-scale savers, as
they maintained the size of their demand on account holders.

The potential unprecedented tax on deposits is raising
concern among holders of senior bank bonds that they’ll be made
to take losses should another country need rescuing. The Markit
iTraxx Financial Index of credit-default swaps insuring senior
debt of 25 banks and insurers rose as much as 19 basis points to
162 basis points yesterday, according to prices compiled by
Bloomberg. That’s the biggest jump since Aug. 2, before the
European Central Bank steadied markets by announcing its bond-
buying program, and the gauge is now at the highest in almost
three weeks.

Debt Obligations

Banks in the south of Europe, whose governments are most in
need of international cash to meet their debt obligations, bore
the brunt of the increase in swap prices. Contracts on Milan-
based UniCredit SpA climbed as much as 23 basis points yesterday
and were up 13 basis points today at 353, the highest since
March 4, prices compiled by Bloomberg show. Banco Santander SA,
Spain’s biggest lender, surged as much as 21 basis points
yesterday and today rose 13 to 279.

The “one-off” tax on deposits is a situation unique to
Cyprus, Simon O’Connor, spokesman for European Union Economic
and Monetary Affairs Commissioner Olli Rehn, told reporters.

Spain’s 10-year bond yield rose eight basis points to 5.04
percent and Italy’s added nine points to 4.73 percent. While the
five-day decline in Spanish bonds is the longest run since July,
yields climbed no higher than 5.04 percent today, after reaching
5.08 percent yesterday. Yields surged 74 points in Greece and 21
points in Portugal, while falling at least two points for
Switzerland, Germany, Denmark and the U.K.

‘Merit Caution’

“The risks over the coming days still merit caution, given
the potential for the Cyprus mess to shortly morph into wider
concerns,” Ciaran O’Hagan, head of European rates strategy at
Societe Generale SA in Paris, said in an e-mailed note. “The
euro area has created new precedents that are inconsistent with
its aspirations for banking, and monetary, union.”

Rio Tinto Group (RIO) sank 5.2 percent, leading basic-resources
producers lower, as Goldman Sachs downgraded the world’s second-
biggest mining company. ThyssenKrupp AG plunged 5.5 percent
after Handelsblatt reported the German steelmaker is considering
raising capital. Cie. Financiere Richemont SA fell 4.3 percent
as an investor sold a stake of about $570 million in the second-
largest maker of luxury goods.

Greece’s ASE Index (ASE) tumbled 3.9 percent to its lowest level
of the year, with National Bank of Greece SA sliding almost 15
percent, as the market opened following yesterday’s national
holiday. Equity trading in Cyprus won’t start until the day
after tomorrow.

Commodities Retreat

The S&P GSCI gauge of 24 commodities dropped 1.1 percent,
the most in almost a month. Gasoline fell 2.7 percent to $3.0451
a gallon and crude oil slid 1.7 percent to $92.16 a barrel. Corn
and wheat futures rose as cold, wet weather in the U.S. Midwest
hindered fieldwork prior to crop planting.

The MSCI Emerging Markets Index (MXEF) fell 0.5 percent for a
seventh straight loss, the longest losing streak in four months.
Benchmark gauges in Brazil, the Philippines, Thailand and Poland
dropped more than 1 percent, while stocks rebounded in Shanghai,
Taiwan and South Korea. Vale SA, the world’s biggest iron-ore
producer, fell to a six-month low Goldman Sachs lowered its
estimate for the value of the material and cut the price target
on the company’s American depositary receipts.

India’s Sensex index sank 1.5 percent. The Dravida Munnetra
Kazhagam, the largest of the nine partners in the ruling
alliance, said it would end backing for the federal government
following a dispute over alleged war crimes in Sri Lanka.